Question

The Paver Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:

		Cost per Unit
Variable costs
Direct material		$956
Direct labor		643
Variable overhead		306
Total variable costs		$1,905
Fixed costs
Depreciation of equipment		502
Depreciation of building		186
Supervisory salaries		289
Total fixed costs		977
Total cost		$2,882

The company has an offer from Duvall Valves to produce the part for $1,996 per unit and supply 910 valves (the number needed in the coming year). If the company accepts this offer and shuts down production of valves, production workers and supervisors will be reassigned to other areas where, unfortunately, they really are not needed. The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $56,050 per year.

Should the company make or buy the valve?

Answer 1

Answer:-The company should make the valve due to lest cost in making the product.If the company is buy the valve from outside supplier, total loss will be $26760

Explanation:-Extra cost to buy the valve = ($1996 per unit-$1905 per unit)*910 valves

= $82810

Cost benefit due to buy valve from outside supplier =$56050

Total loss to buy the valve from outside supplier = Extra cost to buy the valve- Cost benefit due to buy valve from outside supplier

= $82810-$56050

= $26760

PAVER CORPORATION
Statement of Comparative cost
Manufacturing	Amount	Purchase from outside Supplier	Amount
Alternative 1	Per unit $	Alternative 2	Per unit $
Direct Material	956	Purchase Cost	1,996
Direct Labor	643
Variable Overhead	306
Total Manufacturing cost	1,905	Total Purchase cost	1,996

The fixed cost have no effect on decision making, because they are unavoidable cost, these cost are continue to occur whether product are manufactured or purchased.